SEOUL, June 27 (UPI) -- Basking in an unprecedented festive atmosphere created by World Cup fever, South Korea seems confident that the successful co-hosting of the sports events, highlighted by the national unity shown by millions of soccer fans, may provide momentum for its economy to leap into a new era.
But many economists and business leaders are warning that South Korea's economy could face serious challenges in the aftermath of the U.S. markets' instability, which has led to plunging Seoul stocks and rapid changes in the foreign exchange rates.
Stocks posted the biggest one-day drop since Sept. 12 and wiped out its gains for the year on Wednesday as panic sales were triggered by concerns over U.S. corporate earnings and news of improper accounting at long-distance carrier WorldCom Inc.
"Local markets reacted very sensitively to the WorldCom news as investors expect the accounting irregularities to push U.S. stocks further down," said Kang Bo-sung, an analyst at Shinhan Securities. "The U.S. market is losing investor confidence due to huge current account deficit, worsening corporate earnings and accounting irregularities," said Park Hae-shik, a researcher at the Korea Institute of Finance.
In the currency markets, the U.S. dollar fell to an 18-month low of 1,203 won on Wednesday. The Korean won has soared 10 percent against the dollar in the past three months, undermining the price competitiveness. "The won's rapid gains are feared to erode exporters' profits and hurt the country's export-driven economy," said Shin Hoo-shin of Daewoo Securities.
The strong won would impede cash flow to South Korea's leading industries, such as shipbuilding, automobiles, semiconductors and fibers, major drivers of South Korea's economic growth that account for 35.3 percent of the country's total exports. Lee Chang-son, a researcher at the LG Economic Research Institute, forecast the won to keep rising, citing lingering the U.S. economic uncertainties.
Reflecting the negative impact of the won's rise against the dollar, South Korea's exports are expected to grow a mere 1 percent per year in June, sharply slower than the 6.9 percent rise in May, according to the Ministry of Commerce, Industry and Energy.
South Korea's key business sentiment index for June declined amid corporate concerns over a slower-than-expected U.S. economic recovery and its impact on domestic exports, said the Federation of Korean Industries, an influential business lobby.
Businesses have called for government measures to cope with the steep upswing in the won's value against the dollar. The Korea Chamber of Commerce and Industry said local exporters want the won to fall to at least 1,300 against the dollar to restore their price competitiveness.
But the government ruled out an early intervention in the foreign exchange market. Officials said the government "in principle" would let the market force dictate movements of the dollar-won exchange rate in the local market.
Commerce Minister Shin Kook-hwan told business leaders Thursday that the strong won is "inevitable" as it is a result of the country's healthy economy. Kim Yong-duk, deputy finance minister, said the negative impact from the dollar's depreciation against the won on local exporters will likely be limited as the dollar also fell against the yen. Kim called for local stock market participants to have "confidence" over their investment decisions, saying, "There's no reason to just follow the U.S. markets."
Byeon Yang-ho, the ministry's finance policy chief, said local stock market investors were overreacting to uncertainties in the U.S. economy, rather than making judgment based on the South Korean economy's fundamentals. "Korea's economic fundamentals remain strong and investors should stick to a long-term view," he said.
The ministry on Wednesday revised upward its official economic growth forecast for this year to 6 percent to 6.9 percent from the previous 5 percent to 5.9 percent, citing positive industry data.
Officials said the successful co-hosting of the World Cup soccer finals would help boost South Korea's economy by greatly upgrading the country's brand value. "We think the World Cup has allowed Korea's brand image to join the world's 12 best from about 30th," a Commerce Ministry official said.
An estimated 20 million people -- almost half the country's population -- have turned South Korea's streets into a nationwide party in the past few weeks as they cheered on their national team in front of big screens across the country. "Koreans' orderly street cheering have contributed greatly to boosting the nation's external image and brand recognition of Korean products," the state-run Korea Trade-Investment Promotion Agency said.
Upbeat over the national unity shown during the tournament, the government Wednesday unveiled programs aimed at maximizing the World Cup effect. The economic ministers decided to hold a session in London on July 3 to promote the image of the country's dynamic economy, which will be followed by similar sessions in the United States, Europe and Asian countries.
The Commerce Ministry said it would focus on raising prices for 10 percent of export goods, using South Korea's wide publicity during the soccer tournament as a steppingstone. The government will also consider building a huge structure, akin to the Eiffel Tower in Paris, in Seoul to serve as a landmark for tourism in the country.
Business leaders and some economists believe the government is too optimistic about the economy, ignoring economic conditions that have worsened during the soccer tournament.
Sohn Byung-doo, FKI vice president, blasted the designation of a one-time public holiday on July 1 to celebrate South Korea's advance to the semifinal of the World Cup. "The government has designated a day off at a critical time when it devises ways of harnessing the popular energy to workplaces," he said. "It is wrong for the government to encourage the public to stay in the World Cup festive mood."
Cho Myung-hyun, an economics professor at Korean University, called on the government and the people to get out of the World Cup euphoria to tackle growing economic woes.
"The economy can keep upward momentum only when Korea continues to push for an restructuring campaign later this year," said Lim Kyung-mook, an economist at the Korea Development Institute, a government think tank.
